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India’s 2015 Budget introduces a number of changes designed to improve India’s attractiveness for investment. In particular, it aims to reduce compliance cost and uncertainty. There are, however, a few opportunities that have been missed, and there remain some areas of ambiguity.

I. Introduction

On February 28, 2015, the Indian Finance Minister, Mr Arun Jaitley, announced the 2015 India Budget. The 2015 Budget has been the most highly anticipated event of the new government and has been keenly awaited by global investors and the business community alike. The Modi-led government has taken policy measures that are bold, decisive and pragmatic — clearly, a major step in the right direction for achieving a projected 8.5% growth rate in 2015–16 and moving towards the hallowed two-digit growth rate in the near future. A slew of regulatory and fiscal measures proposed in the budget seek to improve India's investment and business environment.

This budget does provide a clear roadmap and potential for high inclusive growth. The government seems to be committed to reducing overall tax compliance costs, removing uncertainty, ensuring a stable and non-adversarial environment, boosting investor confidence and fostering a favorable business and investment regime. While it is a great way to bring India back on the global investment radar, some of the fine print in the budget may act as an irritant. The trick now lies in how the government converts its vision into reality by executing what it has committed to do.

The following provides an analysis of the key proposals of the 2015 Budget.

II. Clarity on Indirect Transfer Tax

The finance minister made significant changes to the indirect transfer tax provisions in the Income Tax Act 1961 (“ITA”). Capital gains tax in most countries is typically based on residence and not on source and very few countries tax the indirect transfer of shares by offshore companies. On the other hand, by virtue of section 9, the ITA taxes capital gains based on the source of the gains and it further expands the existing source rules for capital gains. The indirect transfer tax provisions were introduced in the Finance Act 2012 by way of Explanation 5 to ITA section 9(1)(i), “clarifying” that an offshore capital asset would be considered to have a situs in India if it substantially derived its value (directly or indirectly) from assets situated in India.

The Finance Bill 2015 (“the bill”) proposes to make various amendments to these provisions on the basis of the report submitted by the Expert Committee headed by Dr Shome (“the Committee”) which was formed by the then Prime Minister:

• Threshold test on substantiality and valuation. Seeking to bring clarity in the taxation of indirect transfer of assets, the 2015 Budget proposes to introduce a threshold test to establish whether a company has a substantial business interest in India or not. The share or interest of a foreign company or entity will be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India if, on the specified date, the value of Indian assets (a) exceeds the amount of 100 million rupees ($1.6 million), and (b) represents at least 50% of the value of all the assets owned by the company or entity. The assets will be valued at their fair market value (“FMV”), without reduction of liabilities, if any. The manner of determination of the FMV of the assets will be notified by an amendment to the rules.

Date for determining valuation. Usually, the specified date of valuation will be the end of the accounting period preceding the date of transfer. However, the specified date will be the date of transfer in cases where the book value of the assets on the date of transfer exceeds by at least 15% the book value of the assets as on the last balance sheet date preceding the date of transfer. This will result in ambiguity, especially in cases where intangibles are being transferred.

• Taxation of gains. The capital gains that arise on the transfer of a share or interest deriving, directly or indirectly, its value substantially being from assets located in India, will be taxed on a proportional basis based on the assets located in India vis-à-vis global assets. The manner of determination of proportionality will be separately notified as an amendment to the rules. It will be essential to ensure that only the value of the Indian assets is taxed in India. It is also important to address the cost adjustment, if any, at a later point in time when the Indian assets are transferred. For example, if an offshore company derives substantial value from an Indian company's shares held by it, and tax is paid on transfer of the offshore company on account of the value derived from India, will there be a step-up in cost basis if the shares of the Indian company are subsequently transferred?

• Exemptions. The bill also provides for situations when these provisions will not be applicable. These are:

— Where the transferor of shares of or interest in a foreign entity, along with its related parties does not hold (a) the right of control or management, and (b) the voting power or share capital or interest exceeding 5% of the total voting power or total share capital in the foreign company or entity directly holding the Indian assets (“Holding Co”).

— In a case where the transfer is of shares or interest in a foreign entity which does not hold the Indian assets directly, then the exemption will be available to the transferor if it along with its related parties does not hold (a) the right of management or control in relation to such company or the entity, and (b) any rights in such company which would entitle it to either exercise control or management of the Holding Co or entitle it to voting power exceeding 5% in the Holding Co.

— Evidently, no clear exemption has been provided to portfolio investors as even the holding of more than 5% interest could trigger these provisions. This is far from the 26% holding limit which was recommended by the Committee. Listed companies have also not been provided with the exemption which is contrary to what was envisaged by the Committee.

— In the case of business reorganization in the form of demergers and amalgamation, subject to certain conditions which are similar to the exemptions provided under the ITA for transactions of a similar nature.

• Reporting requirement. The bill provides for a reporting obligation on the Indian entity through or in which the Indian assets are held by the foreign entity. It is now mandatory for the Indian entity to furnish information relating to the off-shore transaction which will have the effect of directly or indirectly modifying the ownership structure or control of the Indian entity. Failure on the part of the Indian entity to furnish such information would attract a penalty. The proposed penalty will be a sum equal to 2% of the value of the transaction in respect of which such failure has taken place in case where such transaction had the effect of directly or indirectly transferring the right of management or control in relation to the Indian concern; and 500,000 rupees ($8,000) in any other case.

In this context, it may be difficult for the Indian entity to furnish information in case of an indirect change in ownership, especially in cases of listed companies. Further, there is a minimum threshold beyond which the reporting requirement kicks in. This means that even in a case where one share is transferred, the Indian entity will need to report the change.

All in all, while these provisions will provide some relief to investors, a number of the Committee's recommendations have not been considered by the government. Some of these recommendations are related to exemption to listed securities, P-Notes and availability of treaty benefits. Further, there are no provisions for grandfathering of existing investments made in the past. Questions also arise as to the tax treatment on transactions undertaken between 2012 and 2015, although, in last year's budget, the Finance Minister had clarified that assessing officers would not issue retrospective notices in relation to those provisions.

Yet another issue that has not been considered is the potential double taxation that can happen, especially in multi-layered structures. Further, no changes have been proposed to the wide definition of “transfer” which potentially covers unintended activities like pledge/mortgage of property of the foreign company having assets located in India.

What is worth debating is whether such tax policy is consonant with global tax policies or not, and whether the finance minister should have taken the bold step of scrapping the provisions in the ITA in their entirety.

III. Deferral of General Anti-Avoidance Rules

The GAAR provisions were introduced in the ITA in 2012 and were to be implemented from April 1, 2013. However, recommendations of the Expert Committee were accepted and GAAR was deferred for a period of 2 years, making it applicable from April 1, 2015. This year's budget has reviewed the GAAR provisions and has deferred GAAR further by 2 years, so that GAAR will now be applicable from April 1, 2017. However, in spite of significant changes to the provisions, GAAR still empowers the Revenue with considerable discretion in taxing “impermissible avoidance arrangements”. Further, it has also been proposed to grandfather investments made up to March 31, 2017 and make GAAR applicable prospectively, i.e. to investments made only on or after April 1, 2017. The budget has deferred the implementation of GAAR to reduce tax uncertainty and make it easier for investors to do business in India. Foreign investors had been pushing for a delay in the implementation of GAAR — a measure aimed at checking tax avoidance and allowing the tax department to scrutinize transactions structured to avoid tax deliberately.

IV. Impact on Funds Industry

The funds industry in particular saw several long-standing industry concerns being addressed in this year's budget: pass-through to alternate investment funds (“AIFs”), no minimum alternate tax (“MAT”) on foreign portfolio investors, elimination of tax risk for fund managers, and deferral of GAAR, amongst others. While these changes may have been well-intentioned, in practice several of the proposals fall flat due to drafting gaps and loopholes. Discussed below are some of the key points for the funds industry from the budget.

A. Pass-Through Status for AIFs

Globally, funds have been accorded pass-through status to ensure fiscal neutrality and that investors are taxed based on their status. This is especially relevant when certain streams of income maybe tax-free at investor level due to the status of the investor, but taxable at fund level.

Prior to the budget announcement, pass-through status was only available to a limited category of funds, i.e. Category I AIFs under the venture capital fund sub-category and venture capital funds that were registered under the erstwhile SEBI (Venture Capital Funds) Regulations 1996. In line with global best practices, the budget has proposed pass-through status for Category I and Category II alternative investment funds registered with the Securities and Exchange Board of India (“SEBI”) under the SEBI (Alternative Investment Funds) Regulations 2012 (“AIF Regulations”). These investment funds inter alia include domestic venture capital, infrastructure, private equity and debt funds. Consequently, investment income earned by the fund would be taxable at the hands of the investor only, while business income continues to be taxed at the maximum marginal rate at the fund level, and the tax obligation will not pass on to the unit holders.

The bill further provides that where the total income of an investment fund in a given previous year (before making adjustments) is a loss under any head of income and such loss cannot be, or is not wholly, set-off against income under any other head of income, the bill allows such loss to be carried forward and set-off in accordance with the relevant provisions relating to carry forward and set off of losses. Further, the loss will not pass through to the unit holders of an investment fund and accordingly, the unit holders will be precluded from off-setting their proportionate loss from the investment fund against other profits and gains that they may have accrued. This is unlike under the current rules for taxation, where a trust is regarded as being a determinate trust or where an investor's contribution to the trust is regarded as a revocable transfer, in which case the investor retains the ability to off-set its proportionate losses against its other profits and gains.

An important feature of the pass-through framework is the requirement of a withholding tax of 10% on distributions on non-business income by the fund to its unit holders as outlined in the newly proposed ITA section 194LBB. The proposed provision requires the fund to withhold tax even in scenarios where income is not actually paid or credited but only deemed to be credited.

A welcome move is that income received by investment funds will be exempted from TDS by portfolio companies. While a separate notification would be issued in this respect, when implemented, it should be helpful in case of interest or coupon payouts by portfolio companies to such funds. Previously, there were administrative difficulties for investors wishing to take credit of the TDS withheld by portfolio companies.

While the proposed pass-through regime is a welcome development, it is not without difficulties. One concern is that the proposed withholding obligations may potentially apply to exempt income such as long term capital gains on listed shares, dividends which would defeat the purpose of pass-through status granted to funds. Clarity on applicability of the withholding obligation is also needed in respect of non-resident investors who are eligible to treaty benefits.

B. Permanent Establishment Exemption for Fund Managers in India

Under current Indian treaties and domestic law, the presence of a fund manager in India increases the risk of the offshore fund establishing a permanent establishment/tax presence in India. Consequently, it exposes the risk of the profits of the offshore fund being subject to tax in India, to the extent attributable to the PE. Presently, India-focused offshore funds deal with this risk by engaging managers outside the country, or engaging Indian residents on an advisory basis.

To encourage fund managers to reside in India, an exemption was introduced in 2015 to eliminate tax risk on account of PE of the offshore fund due to presence of the fund manager in India. According to the newly introduced section 9A, having an eligible fund manager in India should not create a tax presence (that is, a business connection for the fund in India), or result in the fund being a tax resident of India.

However, several stringent criteria at fund level are prescribed:

• The fund should have a minimum of 25 members who are directly/indirectly unconnected persons. This seems similar to the broad-based criteria applied to Category II FPIs and may not be fulfilled by private equity/venture capital funds which may often have fewer investors. Further, there is no clarity on whether the test will be applied on a look through basis (which could impact master-feeder structures).

• Restrictions in control and management of Indian portfolio companies. These criteria may make it difficult for venture capitalists/private equity, growth or buy-out funds to qualify since typically such funds take a controlling stake and management rights in the portfolio companies.

• Investor commitment restrictions. Any member of the fund along with connected persons should not have a participation interest, directly or indirectly, in the fund exceeding 10%. The aggregate participation of 10 or less people, directly or indirectly should be less than 50%. This would restrict the ability of the fund sponsor/anchor investor to have a greater participation. It would also have an impact on master feeder structures or structures where separate sub-funds are set up for ring fencing purposes.

Another set of criteria have been prescribed at fund manager level which prescribes a limitation of profit entitlement to 20% and that the fund manager should not be an employee of the fund, amongst others. Commercially, due to risk-related reasons, it is preferred that managers are not engaged on a consultancy/independent basis.

While due to the introduction of these provisions, venture capitalists/private equity players will not be left worse off, as discussed above, they are unlikely to be able to take advantage of section 9A. To further the intent of mitigation of PE risk for fund managers, it would have been more appropriate to clarify the risk on account of co-location servers in India on which automated trading platforms are installed. Further, FPI income is characterized as capital gains, and hence, the PE exclusion may only be relevant to a limited extent.

C. Applicability of MAT on Foreign Investors

Indian MAT is a minimum level of tax required to be paid by a company on overall book profits, where the overall tax paid by the company is less than 18.5% of the book profits. This year, a specific proposal excluding long term capital gains of foreign portfolio investors from the purview of MAT has been introduced. However, several other foreign venture capitalists/private equity investors earning exempt income in India may still fall foul of the MAT provisions.

In line with judicial precedents, the best case scenario was an exemption from applicability of MAT for all non-residents across the board, including private equity investors claiming capital gains tax exemption under a treaty (e.g. those based in Mauritius or Singapore) as long as there is no PE in India. In the absence of a specific provision of this sort, the proposal could backfire and open the doors to a series of litigations on the unresolved issue of MAT on non-FPIs.

This is especially relevant since recently many offshore funds have received tax notices on MAT. It is surprising that, as a policy decision, the finance minister has ignored non-resident investors who invest in India with a long term view, who may now be adversely affected by this proposal.

V. Tax Additions on REITs: Pass-Through Remains Partial

The legal and tax framework for real estate investment trusts and infrastructure investment trusts (“REITs”) was introduced in 2014, but has not taken off yet due to tax uncertainty as well as commercial factors. On the tax front, it is now proposed that pass-through status be extended to rental income from property directly held by the REIT. Further, sponsors of REITs who acquired units through swap of SPV shares can now benefit from capital gains tax relief on sale of listed units on the stock exchange. Certain larger issues remain unaddressed such as MAT relief to REITs, capital gains or stamp duty exemption for the sponsor where property is directly transferred into the business trust.

In the absence of capital gains and stamp duty exemptions being accorded to the sponsor for direct transfer of property, the pass-through that has been given for rental income would remain largely ineffectual since developers would be unwilling to transfer property into the REIT after incurring significant costs. Further, since no pass-through in respect of dividend distribution by the SPV has been accorded, the pass-through accorded to business trusts remains partial and not in line with investor expectations.

Although developers and investors alike have largely been expectant of a mass iron-out of the tax framework for REITs, the proposals made in the bill still leaves unaddressed tax issues.

VI. Tax on Offshore Activities

The 2015 Budget has proposed two key sets of provisions which could affect offshore assets and structures. First, the residency rule for offshore entities has been changed to bring in the place of effective management (“POEM”) rule, which could subject several offshore entities to tax in India. Second, strict penal consequences have been introduced for failure to disclose offshore assets (including shares). Both these measures are expected to have a significant impact on outbound investments by Indian residents.

A. Place of Effective Management

To date, offshore companies have been treated as “non-resident” in India unless they are wholly controlled and managed from India. In consequence, the income of such offshore companies is not taxable in India unless it is distributed to an Indian resident shareholder. Further, even in situations where the offshore company is 100% owned by Indian residents and has majority Indian directors, it has been held that there should be no residence in India if board meetings are held outside India. The bill proposes moving to a more subjective test of POEM, and considers a foreign company resident in India if its POEM is in India at any time in the relevant financial year. POEM has been defined to mean, “a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made”.

While the change has been introduced based on international standards (particularly those of the OECD), the deviation is that the Indian threshold is triggered even if POEM exists for a certain period during the financial year, whereas the OECD standard looks for the predominant POEM during a given year. This makes it possible that an offshore company could be considered “resident” and taxable on a global basis in two or more countries at a given time (India, where a part of the POEM exists, the OECD country with substantial POEM and the country of incorporation if it does not recognize the country of management). This could have an impact on a range of structures, including outbound investment structures by Indian business families and personal wealth/carried interest structures such as personal holding companies.

B. Disclosure and Tax on Offshore Assets

Offshore holding structures will also be impacted by the stringent disclosure requirements and penal consequences introduced by the budget (discussed below).

In 2012, it was made compulsory for Indian residents to disclose all offshore assets (including bank accounts, beneficial interest in trusts, etc.) in their tax returns, irrespective of whether any income has accrued to the resident in the relevant financial year. As part of the Modi Government's commitment to identify and stem the generation of “black money”, the finance minister has proposed to introduce a bill in the ongoing parliamentary session to deal solely with offshore black money.

The features of the bill include:

(i) A penalty of 300% and 10 years' rigorous imprisonment with no recourse to the Settlement Commission in case of income and asset concealment and tax evasion in relation to foreign asset;

(ii) Imprisonment up to 7 years in case of non-filing of returns or filing returns with inadequate disclosure of foreign assets;

(iii) Undisclosed income from foreign assets or income from undisclosed foreign assets will be taxable at the maximum marginal rate (30%) and will not be eligible for any statutory exemptions or deductions;

(iv) Mandatory filing of returns in case of beneficial owners of foreign assets or beneficiaries of foreign assets. The finance minister has proposed to include “concealment of income or evasion of tax in relation to a foreign asset” as a predicate offence under the PMLA, thus enabling the confiscation of foreign assets unaccounted for and prosecution of persons involved.

The proposed measures have a laudatory aim and may also prove to have a deterrent effect. That said, there have been no details provided on the safeguards to ensure legitimate accounts are not sealed and honest taxpayers harassed, as there are legally permissible circumstances when assets obtained abroad can be retained abroad.

There is also a need for more clarity on how beneficiaries of foreign discretionary trusts will be treated. In many instances, individuals are not aware that they have been named beneficiaries, especially in the case of testamentary trusts. Imposing a mandatory filing requirement in such cases will end up causing hardship.

VII. Change in Tax Rates

There is no change to the corporate tax rate of 30% for domestic companies this year. The finance minister announced a reduction in the corporate tax rate from 30% to 25% over the next 4 years starting from financial year 2016–17 in a phased manner. This would be coupled with the discontinuance of exemptions and concessions which are currently provided in a phased manner.

Currently, India has one of the highest corporate tax rates in the Asia-Pacific region and a reduction in corporate tax rates will boost the Indian business environment.

Surcharge on the other hand, has been increased by 2% for domestic companies, thereby increasing maximum effective rates to 34.61%.

The base income tax brackets for the financial year 2015–16 have not been changed for individuals, Hindu undivided families (“HUFs”), associations of persons and bodies of individuals, but, limits on various rebates applicable to individuals have been increased, particularly, those related to promoting social security. An additional 2% surcharge on high net worth individuals (with income in excess of 10 million rupees ($160,000)) is proposed to be introduced in lieu of the wealth tax which has been abolished by this budget. This step was taken since the wealth tax was proving to be a low yield, high cost revenue measure.

It is proposed to reduce withholding rates applicable in case of royalty and fees for technical services to offshore entities from 25% to 10% (on a gross basis). Most Indian tax treaties place a cap on withholding on royalty and fees for technical services of between 10–15%, and the payee would be able to claim foreign tax credit in its country of residence. However, the lower rates would be beneficial to pass-through entities such as partnerships, LLCs, etc which may not be eligible to claim treaty relief under the relevant treaties, or entities situated in non-treaty jurisdictions. Such a move will boost industries such as technology transfer, knowledge sharing and collaboration agreements across sectors and even the domestic manufacturing/service industry.

The existing regime of allowing a lower withholding rate applicable on interest paid on non-convertible debentures to FPIs of 5% is proposed to be extended for payments up to June 2017 (currently applicable to May 2015).

VIII. Changes to Indirect Tax

One of the major announcements on indirect tax was the proposal to implement a unified goods and services tax (“GST”) regime from April 1, 2016. The GST is a long-pending demand that has been coming from the industry and the commitment to introduce the same in 2016 is welcomed by investors.

Another major change is the increase in the rate of service tax and the standard ad valorem rate of central excise duty from 12.36% (inclusive of cesses) to 14% and 12.5%, respectively.

Further, with effect from April 1, 2015, services of mutual funds agents and mutual fund distributors will no longer be exempt from service tax. Under the reverse charge mechanism, service tax on such services will be payable by the assets management company or the mutual fund receiving such services.

With a view to encourage digitization of indirect tax processes, the finance minister announced that electronic records and digitally signed invoices will be accepted for central excise and service tax purposes. Online central excise and service tax registration is proposed to be completed within 2 working days.

IX. Changes to Regulatory Regime

A. Foreign Equity Investment to be Regulated by Central Government

Marking a radical shift, the 2015 Budget seeks to shift the power to regulate non-debt capital account transactions from the fold of RBI to central government, limiting the powers of RBI only to capital account transactions involving debt instruments. It should be noted that the definition of debt instruments will be as defined by central government.

B. Composite Caps

To simplify the procedures for Indian companies to attract foreign investments, the finance minister has proposed to remove the distinction between different types of foreign investments, especially between foreign portfolio investments and foreign direct investments, and replace them with composite caps. For example, in the defence sector, investment by FPIs is currently not permitted. Once the bill has been notified, FPIs would be able to utilize the 26% foreign investment limit currently reserved only for FPI investors.

The budget proposes to treat non-banking financial companies (“NBFCs”) as financial institutions under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (“SARFAESI Act”).

The finance minister announced that NBFCs (a) are registered with the RBI and (b) have an asset size of 5 billion rupees ($80 million) will be considered as a “financial institution” for the purposes of the SARFAESI Act.

This is a welcome move for the NBFC industry in India for the following key reasons:

• Eligible NBFCs will be able to enforce security interest without court intervention thereby considerably expediting the security enforcement mechanism;

• Assets of eligible NBFCs can be sold to asset reconstruction or securitization companies; and

• Eligible NBFC will also be considered a qualified institutional buyer and will be able to acquire security receipts issued by an asset reconstruction company or a securitization company.

D. New Bankruptcy Code

Considering the failure of the Sick Industrial Companies (Special Provisions) Act 1985 (“SICA”) and Board for Industrial and Financial Reconstruction (“BIFR”) as suitable mechanism for regulating bankrupt companies in India, the finance minister has announced the government's intention to introduce a “comprehensive Bankruptcy Code” for dealing with bankrupt companies in India. This is a welcome, and much needed, move to bring Indian insolvency regulations in line with well-established international practices.

E. Boost for Insurance Sector

The government has proposed that employees of specified income brackets to have the choice between contribution to employee state insurance or to any other private health insurance offered by an insurer recognized by the Insurance Regulatory Development Authority of India. There is also an increase in the income tax deduction limits on account of contributions made towards life insurance pension plans. These proposals along with the recently raised foreign investment cap in the insurance sector should attract more private players and investments in this high potential space.

F. Infrastructure Financing

One of the key focus areas for the government in 2015–16 is infrastructure and two proposed developments include:

(i) The creation of a National Investment and Infrastructure Fund (“NIIF”) with an annual flow of 200 billion rupees ($3.2 billion) into it, which would be raised through debt. The fund would invest in equity of infrastructure finance companies; and

(ii) The introduction of the Public Contracts (Resolution of Disputes) Bill to streamline resolution disputes arising from public contracts.

Both these measures should increase much needed investor confidence in the infrastructure sector. In fact, the introduction of a specific dispute resolution mechanism will add predictability and expedite conflict resolution, which in the past has been a major concern for investors, private participants and financing of such projects.

X. Missed Opportunities

From a policy perspective, the 2015 Budget seems to have set the right tone. Several long standing industry concerns have been attempted to be addressed. However, opportunities still remain that have not been addressed, which are discussed below.

A. Clarity on Entitlement to Tax Treaty Benefits

For foreign investors, especially offshore funds, treaty entitlement is vital. The periodic discussions on availability of the Mauritius treaty benefits, unilateral anti-avoidance rules such as the notification on Cyprus and uncertainty around the general anti-avoidance rule make it difficult for investors to take long term business decisions. Clarity on this front would have been hugely beneficial, especially since tax authorities have been increasingly challenging treaty entitlement alleging tax avoidance, ignoring commercial considerations such as ring fencing, ease of fund raising.

B. Applicability of MAT

The budget has specifically clarified that MAT is not applicable in case of FPIs. However, ambiguity still surrounds applicability in case of other non-residents availing treaty benefits, particularly on exempt capital gains earned on exit by strategic investors in Indian companies. In fact, by specifically only referring to FPIs, the budget announcements have created ambiguity as to whether non-residents other than those specifically exempted are sought to be covered under the MAT provisions.

C. Dividend Distribution Taxes

A clear departure from global best practices, under Indian laws corporate profits distributed at the time of dividend distribution are subject to tax at the hands of the company, and such dividends are tax-free at the hands of the shareholder. This deviance creates difficulties in claiming treaty relief or foreign tax credit in respect of the dividend distribution tax. A move back to a dividend withholding tax regime would have eased the cost of doing business in India.

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